Securities Industry Commentator by Bill Singer Esq

September 23, 2019
Our publisher, Bill Singer, Esq. thinks that a FINRA Arbitration Panel and two federal courts got it right when they ruled in favor of two former Barclays employees, who were relieved of repayment of just shy of $4 million in promissory notes' balances. Unfortunately, Bill detests the lack of content and context in the FINRA Arbitration Decision, and the federal courts didn't seem all that enamored with what was before them for review. Sometimes its about the trip. Sometimes its about the destination. Today's blog highlights a case in which the passengers all got to where they were going, and likely had a great time after they arrived -- on the other hand, on the way, the car ran out of gas, punctured two tires, overheated, lost its air conditioning, and wound up on a four-year detour. 

United States of America, Appellant, v. Michael Gramins, Defendant/Appellee (Opinion, United States Court of Appeals for the Second Circuit ("2Cir"), 18-CR-2007 / September 20, 2019)
As set forth in the 2Cir Opinion's Syllabus:

Michael Gramins, a trader of Residential Mortgage‐Backed Securities 27 ("RMBS"), was convicted of conspiracy to commit wire fraud and securities fraud 28 by a jury in the United States District Court for the District of Connecticut.  At Gramins's trial, the district court had admitted testimony from one of Gramins's counterparties tending to establish that the counterparty credited Gramins's representations when Gramins acted as a "broker" between two counterparties. 

Shortly following Gramins's conviction, we decided United States v. Litvak, 889 2 F.3d 56 (2d Cir. 2018) ("Litvak II"), which held in the context of a similar prosecution that the erroneous and idiosyncratic viewpoint of a defendant's counterparty could not be relevant to the objective, "reasonable investor" standard for materiality in a securities fraud prosecution. The district court (Chatigny, J.) then sought to apply our holding in Litvak II  to this case, and granted Gramins's motion for a new trial on the basis that counterparty testimony had been improperly admitted against Gramins at trial.  We conclude, however, that the counterparty testimony at Gramins's trial was not improperly admitted and did not implicate our holding in Litvak II.  Accordingly, the judgment of the district court is REVERSED and the case is REMANDED to the district court with instructions to reinstate the conviction.

Former Scottsdale Resident Sentenced to 42 Months for Securities Fraud (DOJ Release)
William "Lance" Mullins pled guilty in the United States District Court for the District of Arizona to engaging in fraudulent interstate securities transactions and was sentenced to 42 months in prison plus three years of supervised release, and he was ordered to pay over $2.8 million in restitution to 125 victim shareholders. As set forth in part in the DOJ Release:

Mullins was involved with a Tempe, Ariz.-based technology company called Xhibit Corporation, whose stock was publicly traded on the over-the-counter market and which merged with the airplane catalog SkyMall in May 2013.  In 2012 and 2013, before the SkyMall merger, Mullins and others made misrepresentations about the company when recruiting investors.  They also engaged in manipulative trading of Xhibit stock that is prohibited by U.S. securities laws and regulations.  Their prohibited trading activities artificially inflated Xhibit's stock price and made it falsely appear that there was more demand for the stock.  Because of these actions and other events, Xhibit's stock price rose sharply, from less than a dollar in early 2012 to a peak of more than seven dollars in May 2013, and then fell just as quickly.  Mullins made more than $1 million from selling much of his own stock before the stock price dramatically fell, while unknowing shareholders lost millions.  

Two others pleaded guilty to conspiracy to commit securities fraud in related cases and were sentenced in June 2019.  Nicolas Russo, Jr., 72, of Fountain Hills, Arizona, and Larry Eiteljorg, 70, of Scottsdale, Arizona, were sentenced to probation and ordered to pay restitution after cooperating with the government's investigation.

Remarks at the SIFMA Equity Market Structure Conference: The Dynamics of our Markets and the Changing Structure on which they are Built (Speech by SEC Commissioner Elad L. Roisman)
SEC Commissioner Roisman offers some provocative thoughts about Best Execution and the "Order Protection Rule: ("OPR"); in part, he muses:

And yet my concern is that, for some, the focus on price and time and the avoidance of trade-throughs has become a substitute for a more robust best execution analysis-the notion being, that if brokers simply seek the best price at a given moment, other variables are less important, or perhaps more difficult for a regulator or customer to criticize. I recognize that some of this may result from a weighing of risk, both from a regulatory standpoint and also commercially. Whereas several best execution factors are subjective in nature, and perhaps defensible under scrutiny, price is relatively cut and dry. But price is just one factor in a best execution analysis, not only when firms make routing decisions, but also when regulators review these decisions after the fact. Finally, some have noted that this framework for regulator review of best execution often has been process-oriented-i.e., requiring that brokers show their work-rather than focused on outcomes for customers. Is this how we should continue to think about best execution, or should we focus more on outcomes? For example, what if a broker accesses a quote with relatively small size, perhaps to satisfy OPR, but by doing so chases off a larger order that may have more closely achieved best execution for the customer? Should there be some combination of approaches, such as a safe harbor for certain outcomes?
In a Complaint filed in the United States District Court for the Northern District of Indiana, the SEC charged Earl Miller with violating the antifraud provisions of Section 10(b) of the Securities and Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. The Court entered a Final Judgment and, thereafter, an Amended Judgment against Miller  permanently enjoining Miller from future violations of the antifraud provisions of federal securities law, and ordering him to pay $4,141,133 in disgorgement plus $799,597 in prejudgment interest, and imposing a civil penalty of $320,000. In part the SEC Release alleged that:

[I]n raising money for his private funds, Miller - then based in Mishawaka, Indiana - touted his Amish heritage to raise money from the Indiana and Michigan Amish community and encouraged his victims to invest their retirement savings in his funds.

. . . 

[T]he SEC alleged that, while Miller promised he would not be paid for managing the funds, he took over $1.1 million of investor money to pay himself and to buy out his former business partner. The SEC further alleged that Miller lied to investors about the nature of their investments and purported safeguards, which he never implemented. When Miller's investments failed, his funds collapsed and 72 investors lost over $4.1 million. On August 10, 2017, the Court entered a default judgment against Miller for his repeated failures to comply with discovery orders.
In a Complaint filed in the United States District Court for the Northern District of Illinois, the SEC charged Zvi Feiner and his company FNR Healthcare, LLC, and former FNR executive Erez Baver with having violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Also, the Complaint named as  Relief Defendants, Baver's company Cedarbrook Management, Inc., and Feiner's company Netzach Investments LLC. Without admitting or denying the Complaint's allegations,  Baver and Cedarbrook agreed to settle the charges with Baver consenting to entry of a final judgment that permanently enjoins him from future violations of the securities laws, orders him to pay disgorgement and prejudgment interest of $360,776 and a civil penalty to be determined by the court upon motion of the SEC. Further, Baver and Cedarbrook agreed to jointly and severally pay $1,892,958 in disgorgement and prejudgment interest. As set forth in part in teh SEC Release:

[F]einer and FNR began soliciting funds from investors in 2010, including more than $10 million from at least 62 investors since 2014. According to the complaint, Baver assisted Feiner with raising funds for certain of these entities starting in 2014. The complaint alleges that investor funds were pooled together in limited liability companies that would purchase nursing homes and assisted living facilities throughout the Midwest, and, since 2010, Feiner and FNR raised funds for approximately twenty limited liability companies. The defendants are alleged to have told investors that the investments were low-risk and would generate high returns from the successful operations of the nursing homes and assisted living facilities. However, according to the complaint, the defendants misappropriated investor funds to, among other things, pay distributions to earlier investors, support other struggling properties, pay back loans taken out on other properties, and for their own personal use.